Sales and Use Tax Annotations

Annotation 120.0543

(a) IN GENERAL

120.0543Software Maintenance Agreements—Delivered Electronically. A taxpayer, a software developer and publisher, sells software licenses and software maintenance agreements to its customer. Maintenance agreements are optional and are typically sold for a term of 12 months and renewed annually unless terminated by either party. Currently, the software licenses and updates provided in the software maintenance agreements are delivered in tangible form. The taxpayer will have the capacity to deliver software and updates electronically in the near future. As a result, future software licenses and maintenance agreements may not include a transfer of tangible personal property. Some customers have requested to terminate their existing maintenance agreements at the end of their 12-month term and sign new agreements detailing that the updates be transmitted electronically. The new maintenance agreements will be regarded as the transfer of non-tangible personal property where the taxpayer and its customers actually terminate their previous agreements and enter into new (and valid) agreements requiring the transmission of updates in electronic transmission, and the taxpayer actually transfers the updates in electronic transmission to its customers.

On occasion, customers will purchase additional software licenses throughout the year. In order to have all of the software maintenance agreements expire at the same time, the taxpayer's practice has been to terminate the existing maintenance agreement (granting credit for the unused portion) and have the customer sign new 12-month maintenance agreements for both the pre-existing and newly purchased license. All would then have the same term. The new agreements require electronic software transmission. The sale of the initial maintenance agreement was a taxable sale. A customer's return of only a portion of a maintenance agreement does not qualify as "returned merchandise" pursuant to Regulation 1655(a). There is no provision that allows the taxpayer to claim a tax credit (or deduction) based on the customer's return of an unused portion of the maintenance agreement.

In connection with its sales of software electronically, the taxpayer may send documentation in tangible form to its customers. This documentation may be sent either on paper or a CD-ROM. The CD-ROM does not contain any software such as a search engine in which to access particular information on the disk. Under these facts, the taxpayer's transfer of software documentation (and not the software itself) to its customers in either CD-ROM or paper form is subject to tax where it makes a separate charge to its customers for such documentation. Where no charge is made, the taxpayer is the consumer of its documentation materials. 4/19/96. (Am. 2004–2).

(Note: Regulation 1502 was amended so that beginning January 1, 2003, 50 percent of the charge for optional software maintenance agreements is subject to tax. Prior to that date, generally 100 percent of the charge was subject to tax.)

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